The Year in Stocks
January is a month of excitement as investors redeploy money after having sold money-losing stocks in December so that they can claim losses on their tax returns. In January, the Dow Jones Industrial Average has risen 1.01 percent for the past 100 years and 1.2 percent for the past 50, and it has been flat for the past 20 years, according to Bespoke Investment Group, a research firm that advises institutional investors.1 January is often filled with much emotion. If the past trading year was difficult, hope springs eternal in the New Year. If the past year was good, there is always hope the New Year will be even better. At the start of each year, all banks issue strategy reports predicting what will occur in the stock market. The reports are almost always universally bullish. The notes are widely distributed via massive e-mail distribution lists, institutional salesmen who call on major investors, and even by stockbrokers to their clients.
Two of the market’s most important seasonal patterns occur in January: the January Barometer and the January Effect.
The January Barometer, according to the Stock Trader’s Almanac, is a good predictor of the entire year. If the stock market advances in January, it is usually a good omen for the rest of the year. This has been accurate 78 percent of the time since 1950. The Stock Trader’s Almanac says that every time since 1950 that the Standard & Poor’s 500 Index has declined in January, it has preceded or extended a bear market, ...